DAIRY INDUSTRY LOOKS STRONGMarch 2006Editor's note:The U.S. Dairy market is one of the largest revenue generators in the ag industry totaling $27 billion in farm gate receipts last year. The 2006 milk cow herd is 9.0 million head, average milk production per cow is 19,567 pounds and the 2005 average milk price was $15.14 per cwt, just slightly off last year's record level.

To get a feel for the major issues and opportunities facing the dairy industry, we invited a few of those in the know to provide information about the marketplace.

There're plenty of reasons to feel good about the dairy industry in 2006.

We have just had 23 consecutive months of the benchmark Class III price being above $13.35. The Cooperatives Working Together program removed 64,000 cows from the nation's dairy herd, and the program again has stepped up to the plate to assist in exporting cheese and butter. The Milk Income Loss Contract (MILC) program has been reauthorized providing a cash flow cushion to dairy farmers should milk prices dip down some months.

Recent gains in overall milk largely were driven by jumps in milk per cow, rather than gains in cow numbers. But many people have been disappointed in how their cows have been milking this winter. Forage quality is not great in many areas. And less milk means higher milk prices.

We believe most "demand" signs are encouraging. A healthy economy should mean healthy consumption. The U.S. economy has grown at the rate of more than 3 percent for 10 consecutive quarters. Last year, the U.S. has experienced a net gain of nearly 4 million jobs. Despite concerns about petroleum prices and higher interest rates, the stock market was poised to end 2005 at a higher level than it started the year.

The strong economy should translate in more meals being eaten away from home. The amount of milk represented by additional cheese people eat as part of restaurant meals and carryout far exceeds the greater amount of beverage milk they consume when eating at home.

Given relatively strong cheese and milk prices, prospects for healthy demand, and reasonable feed costs, we believe there's plenty of room for optimism.

There are several developments and touch-points to monitor and consider as the dairy industry consolidates. First, marketers must recognize all industries do not consolidate or integrate identically. Is the industry integrating top-down or bottom-up?

What are the Drivers of the Modern Dairy Market?Purdue's Michael Boehlje and William Schiek, Dairy Institute of California authored a "white paper" entitled Critical Success Factors in a Competitive Dairy Market which identified and predicted the development and impact of the following drivers of change.

Different dairy styles, facilities, managerial ability, business models and financial performance are creating alternative product and service niches.New financing options: More investors and international financial institutions become involved as producers seek alternatives to debt.

Strategic planning:

Successful dairy owners and investors develop the discipline to create and monitor long-term visions and plans allowing for changing business scenarios.

Environmental importance:

State/federal regulations and costs to comply will increase

Changing public policies:

Policy debate driven by special interests, activists and trade partners affects government standards on food safety, quality and animal welfare.

The new breed of dairy producer has a voracious appetite for information. The 2005 Agricultural Media Study conducted by ABM's AgriCouncil documented nearly 4 in 10 producers will increase their use of Print and the Internet over the next 3 to 4 years while 2 in 3 producers ages, 20-29 and 30-39 will increase their use of Print and the Internet. As a result, more dairy manufacturers and suppliers are successfully using print, direct, electronic, relationship, event and involvement marketing activities with producers and the key Consultants of Influence" (COI's) in what ABM describes as a "convergence communications model."

Overview by Capital Press, Salem, ORby Greg Hains, ad sales director

The western dairy industry is one of the most profitable and technologically advanced in the U.S. And one of the most important segments of that industry are the dairy producers within Capital Press' coverage area of California and the Pacific Northwest.

Located near important dairy markets, the area is blessed with ample feed supplies being one of the largest hay-producing regions in the country and has an ideal climate for alfalfa production. It is also a major grain-producing area. This creates a lucrative market for animal health products, breeding services, feed supplements, milking equipment, sanitation supplies, livestock handling equipment, trucks and other related products.

Overview by Dairy Star, Sauk Centre, MNby Jeff Weyer, national sales

In Minnesota, South Dakota and Iowa, we are seeing changes in attitudes by the dairy producers. They are taking a renewed pride in what they do and are willing to embrace the new technology that is arriving on the market daily. With explosive growth in the use of TMR mixers and advances in milking parlor and tie-stall equipment we are witnessing a dramatic decrease in the amount of physical labor necessary to milk cows.

We are seeing many young producers starting up new dairies and many more expressing interest in this occupation. Difficulty in finding a suitable location and ability to secure capital appear to be the biggest hurdles facing them. The larger operators do not appear to have as many financial constraints but they are facing increasing problems with permitting processes.

Land development is also a growing concern throughout the industry. Producers are finding it difficult to compete with land developers as price per acre skyrockets and they are either forced to relocate their farm or sell out. Even in the rural areas, the growing housing industry market has presented challenges as these "new" neighbors lack an understanding of the agricultural environment.

Perhaps the number one challenge we see facing the farmers is the volatility of the milk prices. Combined with the rising costs of inputs such as cattle, feed, and facilities, we see continued flux in the industry.

What does all this mean for the future? Dairy farmers will need to wear many hats. They must not only be good dairymen and dairywomen, but they will also need to have personnel management skills, marketing savvy, technological know-how, and political clout.

Overview by Lee Agri-Media, Bismark, NDby Wendy Sweeter, editor

The year looks positive for the dairy industry in the upper Midwest, but it will face challenges.

Both South Dakota and Minnesota government officials are making the push to bring new dairies to their states. Both states seem to realize the importance of the dairy industry to their state's economies. They know that they have abundant feed sources for dairies and a good infrastructure to transport milk and get feedstuffs.

However, all dairy producers — new ones and those that wish to expand — need to present management strategies to their county zoning boards to put up more dairy barns. It appears that county zoning boards do not have a problem with dairies when they meet environmental regulations and their zoning regulations.

The problems come to dairies when their neighbors start fighting them. These "not-in-my-backyard" folks may be the biggest obstacles for dairy producers this year. In South Dakota, a petition is circulating to refer all zoning issues back to the voters even if the zoning board decides to approve an operation that meets all state and county regulations.

If the instigators of the petition get 17,000-plus signatures by May, their cause will be put on the November ballot. If South Dakota voters vote in favor of the petition, it would allow neighbors to the proposed facility to circulate a petition to get five percent of the voters in the county to hold a special election on the facility.

Another big concern for dairy producers is the proposed budget from President Bush which includes a three-cent per hundredweight tax on milk. The proposed budget also includes changes in U.S. purchases of milk and butter and a five percent cut in the Milk Income Loss Contract (MILC). All could make 2006 a challenging year for dairy producers.